Windfall for local furniture makers
Manufacturers with exports to the United States likely to see a spike in demand
LOCAL furniture makers will gain after the dust settles in the aftermath of the hurricanes that hit the United States and the Caribbean region.
Insurance claims will inevitably rise in countries that have been ravaged by the recent storms and the subsequent rise in expenditures to refurnish homes could see an uptick of demand for furniture.
Companies that could see an increase in demand include those which have a strong customer base in the west particularly the United States.
Furniture makers that are trading at cheaper levels could get more attention from the market but companies that have a high degree of exposure to the United States may rack up more gains from the anticipated rise in orders as the year-end approaches and festivities add to higher demand.
“The disasters in the United States can have a positive impact to companies here although it is hard to say when the impact will kick in as there is a lag. But I think the impact will come in early next year,” Hong Leong Investment Bank Research’s (HLIB Research) analyst Rachael Hong Hui Chee tells StarBizWeek.
She recently initiated coverage on one such potential beneficiary of the reconstruction activities in the United States: Lii Hen Industries Bhd with a “buy” rating and a target price of RM5.04.
Hong says that the recent events there may help boost Lii Hen’s furniture exports as the company ships 77% of its exports to the United States. Malaysia’s wooden furniture exports surged by 25% a few months after Hurricane Katrina in 2005.
“At that time Lii Hen was a small company and while the recent hurricanes did not damage as many homes as Katrina, we still a see a positive impact.
“This company exports are mainly to the west coast of the United States and they (vendors) have many branches across the country. According to its management there will definitely be a positive impact on sales,” Hong says.
She says that the company has seen an increase in orders since the middle of the year.
Other than the hurricanes that could help boost its sales, her report notes that export sales, mostly bedroom sets and panel products, have grown by 59% from RM373mil in 2014 to RM592mil last year.
In US dollar terms, exports sales grew by 49% from US$32.2mil in 2014 to US$47.9mil in 2016.
“Moving forward, we are positive that Lii Hen will continue to demonstrate decent earnings growth that’s underpinned by improving utilisation rate, increasing product range and a bulletproof balance sheet,” she says.
Hong notes that another catalyst to growth could be the company’s decision to expand its product range by diversifying into the manufacture and design of upholstery sofa sets.
“The strengthening of the ringgit notwithstanding, the increase in demand will offset the impact of the foreign exchange,” she says.
Another furniture maker, Poh Huat Resources Holdings Bhd, will also likely see an increase in sales volumes.
TA Research’s analyst Ooi Beng Hooi, who covers Poh Huat, expects a rise in sales for the company although it would be difficult to quantify at this juncture.
“The people in the United States will definitely need to replace their damaged or lost furniture. However, the extent of the damage remains to be seen,” Ooi says.
Ooi tagged a “buy” call on Poh Huat with a target price of RM2.51. “Poh Huat is a listed furniture manufacturer with one of the highest export sales to the United States. More than 90% of its sales are to the United States.
“Some 25% of office furniture are sold to Canada but the Canadian company will usually redirect them to the United States,” Ooi says.
Ooi notes that Poh Huat had recently introduced a new product: panel based bedroom set that’s being manufactured by its Muar plant that will help drive growth in the immediate term.
“Also one of its plants in Vietnam has seen capacity expand by 20% following a renovation after the fire incident there. This is another growth driver for the company,” he says.
On the possible earnings risks from the strengthening ringgit, Ooi reiterates that he still expects for Poh Huat to achieve a record year in 2017 (FY17 ending Oct 31, 2017).
“Without the impact of the foreign exchange, they will still grow unless the ringgit strengthens very significantly,” he says.
In his June report, he says that he has pencilled in a ringgit to US dollar exchange rate assumption of RM4.25 to the dollar in its FY17 earnings forecasts.
While the furniture industry is mostly fragmented in Malaysia, the positive impact will be seen by furniture manufacturers that have most of their sales derived from the United States.
Investors will also have to bear in mind that the impact of natural disasters will mostly be a one-off event that will add to their earnings.
Lii Hen and Poh Huat, which are trading at 8.76 times and 7.04 times earnings respectively, are certainly worth a second look should the cited growth catalysts from new products and capacity expansion add to bottom line numbers over the longer term.
The people in the United States will definitely need to replace their damaged or lost furniture.